Agglomeration in the periphery

i. This discussion paper is a completely revised version of SERCDP0047, published April 2010. This paper argues that agglomeration externalities are important even in the rural periphery. The analysis focuses on the forced relocation of more than a tenth of the Finnish population after World War II. Using the details of the resettlement policy to construct instrumental variables for wartime population growth rate, I find that an exogenous increase in municipality's population had a positive effect on later population growth, industrialization and real wages. These findings are consistent with the presence of agglomeration externalities and inconsistent with other popular explanations for the spatial distribution of economic activity.